6/6/13: The CFPB's (First?) Arbitration Ban

June 6, 2013

The Consumer Financial Protection Bureau released new guidelines this week for its examiners prohibiting the use of mandatory pre-dispute arbitration processes in mortgages for consumer home buyers.

The guidelines implement the second version of the CFPB Supervision and Examination Manual, which the bureau released last Oct. 31.

The manual is a guide used by CFPB examiners who oversee companies providing consumer financial products and services.

The Dodd–Frank Wall Street Reform and Consumer Protection Act granted CFPB rulemaking authority to monitor mortgage loans, among other powers. The bureau issued the guidance to its own examiners for scrutinizing lenders under the Truth in Lending Act. The latest version of the guidance prohibits mandatory arbitration, effective immediately.

Last year, the agency announced that it was looking at arbitration in consumer credit transactions, and asked for comments on how data should be collected. See CFPB's Call for Data: A New Foundation for Arbitration Regulation?" 30 Alternatives 122 (June 2012)(available here with CPR Institute membership or here with subscription).

A CFPB report—and perhaps further arbitration limitations—is expected this year.

The new guidelines' Section 1026.36(h) stipulates that

A contract or other agreement for a consumer credit transaction secured by a dwelling (including a home equity line secured by the consumer’s principal dwelling) may not include terms that require mandatory arbitration or any other non-judicial procedure to resolve any controversy arising out of a transaction. Also, a contract or other agreement relating to such a consumer credit transaction may not be applied or interpreted to bar a consumer from bringing a claim in court under any provision of law for damages or other relief in connection with an alleged violation of any Federal law. However, a creditor and a consumer could agree, after a dispute or claim under the transaction arises, to settle or use arbitration or other non-judicial procedure to resolve that dispute or claim.

The guideline goes against recent U.S. Supreme Court rulings favoring arbitration use over judicial proceedings, even though it provides the exception to allow post-dispute arbitration.

The basis for the examinations is consistent with the bureau’s mission “to make markets for consumer financial products and services work for Americans.” The examination manual describes how CFPB supervises service providers to determine if companies are complying with the consumer financial protection laws.

Since the 2011 release of the first manual, the bureau has issued four guidelines to the manuals, two of which appeared on June 4. While the mandatory predispute arbitration provision takes effect immediately, a substantial part of the latest guidance will take effect next January.

The June 4 mandatory arbitration prohibition is the first mention of arbitration in the four guidelines.

In an effort to ensure all regulators have a shared understanding of the new rule, the bureau is coordinating with other federal government agencies that have similar objectives.

For example, the June 4 guidelines covering the Truth in Lending Act processes are based on approved Federal Financial Institutions Examination Council procedures.

After these and other examination procedures have been updated with the new mortgage rule requirements, CFPB will incorporate additions into its general supervision and examination manual. The material will include Truth in Lending Act processes as well new guidelines under the Equal Credit Opportunity Act.